10-Q 1 j1531601e10vq.txt AMERICAN LOCKER GROUP INCORPORATED 10-Q/QUARTER END 3-31-05 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended March 31, 2005 OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ______________ TO Commission file number 0-439 American Locker Group Incorporated ---------------------------------- (Exact name of business issuer as specified in its charter) Delaware 16-0338330 ---------------------------------------------- ---------------------------- (State of other jurisdiction of incorporation (IRS Employer Identification or organization) Number) 608 Allen Street, Jamestown, NY 14701 ------------------------------------- (Address of principal executive offices) (716) 664-9600 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No[X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes[ ] No [X] As of July 1, 2005 there were outstanding 1,534,146 shares of the registrant's Common Stock, $1 par value. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2005 2004 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 4,617,295 $ 5,780,215 Accounts and notes receivable, less allowance for doubtful accounts of $202,000 in 2005 and $232,000 in 2004 4,755,564 4,402,840 Inventories 5,881,237 6,463,496 Prepaid expenses 315,200 136,316 Prepaid income taxes 7,273 - Deferred income taxes 1,409,230 1,300,230 ------------ ------------ Total current assets 16,985,799 18,083,097 Property, plant and equipment: Land 500,500 500,500 Buildings 3,488,722 3,463,205 Machinery and equipment 12,083,395 11,775,088 ------------ ------------ 16,072,617 15,738,793 Less allowance for depreciation (11,281,417) (11,154,157) ------------ ------------ 4,791,200 4,584,636 Goodwill - 6,155,204 Deferred income taxes 24,558 24,558 Other assets 14,435 14,435 ------------ ------------ Total assets $ 21,815,992 $ 28,861,930 ============ ============
2 AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2005 2004 ------------ ------------ (Unaudited) LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Long-term debt in default and due on demand $ 6,337,051 $ 6,668,596 Accounts payable 1,556,982 1,974,460 Commissions, salaries, wages and taxes thereon 272,963 602,803 Other accrued expenses 685,122 565,477 Accrued environmental settlement 1,102,500 1,102,500 Income taxes payable - 454,059 ------------ ------------ Total current liabilities 9,954,618 11,367,895 Long-term liabilities: Pension, benefits and other long-term liabilities 782,576 707,465 Stockholders' equity: Common stock, $1.00 par value: Authorized shares - 4,000,000 Issued shares - 1,726,146 in 2005 and 2004 Outstanding shares - 1,534,146 in 2005 and 2004 1,726,146 1,726,146 Other capital 97,812 97,812 Retained earnings 11,823,997 17,521,028 Treasury stock at cost (192,000 shares in 2005 and 2004) (2,112,000) (2,112,000) Accumulated other comprehensive loss (457,157) (446,416) ------------ ------------ Total stockholders' equity 11,078,798 16,786,570 ------------ ------------ Total liabilities and stockholders' equity $ 21,815,992 $ 28,861,930 ============ ============
See accompanying notes. 3 AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2005 2004 ----------- ----------- Net sales $ 9,160,220 $ 9,554,307 Cost of products sold 6,461,293 6,412,469 Asset impairment charge - goodwill 6,155,204 - Selling, administrative and general expenses 1,879,956 2,006,661 ----------- ----------- (5,336,233) 1,135,177 Interest income 21,978 5,433 Other income - net 13,275 7,790 Interest expense (107,417) (115,749) ----------- ----------- (Loss) income before income taxes (5,408,397) 1,032,651 Income taxes 288,634 401,831 ----------- ----------- Net (loss) income $(5,697,031) $ 630,820 =========== =========== (Loss) earnings per share of common stock: Basic: Net (loss) income $ (3.71) $ .41 =========== =========== Diluted: Net (loss) income $ (3.71) $ .41 =========== =========== Dividends per share of common stock $ 0.00 $ 0.00 =========== ===========
See accompanying notes. 4 AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2005 2004 ----------- ----------- OPERATING ACTIVITIES Net (loss) income $(5,697,031) $ 630,820 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 137,984 217,789 Asset impairment charge - goodwill 6,155,204 - Deferred income taxes (109,000) - Change in assets and liabilities: Accounts and notes receivable (354,688) (297,557) Inventories 581,792 (1,625,441) Prepaid expenses (179,556) (168,807) Accounts payable and accrued expenses (626,586) 64,502 Pension and other benefits 75,111 54,455 Income taxes (461,841) (104,646) ----------- ----------- Net cash used in operating activities (478,611) (1,228,885) INVESTING ACTIVITIES Purchase of property, plant and equipment (344,763) (67,366) ----------- ----------- Net cash used in investing activities (344,763) (67,366) FINANCING ACTIVITIES Debt repayment (331,545) (328,613) ----------- ----------- Net cash used in financing activities (331,545) (328,613) Effect of exchange rate changes on cash (8,001) (9,009) ----------- ----------- Net decrease in cash (1,162,920) (1,633,873) Cash and cash equivalents at beginning of period 5,780,215 3,597,990 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,617,295 $ 1,964,117 =========== ===========
See accompanying notes. 5 AMERICAN LOCKER GROUP INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, the condensed financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company's management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of such condensed financial statements, have been included. Operating results for the three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. The consolidated balance sheet at December 31, 2004 has been derived from the audited financial statements at the date, but does not include all of the financial information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the Company's consolidated financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2004. On February 8, 2005, the Company announced that it was notified that its contract with the United States Postal Service (USPS) for polycarbonate and aluminum cluster box units (CBUs) would not be renewed, and the contract expired on May 31, 2005. During 2004, 2003 and 2002, sales to the USPS accounted for 53.9%, 52.7% and 56.4%, respectively, of the Company's net sales. In addition, sales of the current model polycarbonate and aluminum CBUs to the private market accounted for an additional 18.6%, 14.6% and 10.2% of the Company's sales in 2004, 2003 and 2002, respectively. Since May 31, 2005, the Company has experienced continuing sales of its current CBU models to the private market, and it is unclear when such sales will begin to decline as the new 1118F CBU specification described below is introduced to the private market and purchasers begin to purchase such units rather than the Company's current model CBUs. The Company does not expect any significant change in sales of its other postal and locker products. The loss of over 50% of the Company's revenues resulting from the nonrenewal of the Company's CBU contract with the USPS, the potential loss of sales of CBUs in the private market during the transition to the 1118F design and the status of the 1118F CBU design and drawing package make the Company's future uncertain. After the USPS notification of non-renewal of the CBU contract, the Company's Board of Directors on May 18, 2005 announced a restructuring plan to significantly reduce annual selling, general and administrative expenses. Most of these savings would be achieved by relocating Company headquarters from leased facilities in Jamestown, NY to company-owned facilities in Grapevine, TX by the end of 2005. As part of this restructuring the Company expects to not renew its existing building leases in Jamestown upon their respective expiration dates in September 2005 and November 2005, discontinue Jamestown based assembly operations, eliminate many of the thirty-seven salaried and hourly positions in Jamestown, and freeze its current pension plan. Due to the non-renewal of the CBU contract, all polycarbonate CBU assembly operations in Jamestown will cease by Fall 2005. Should the Company become an 1118F CBU supplier to the private market, such CBU planning and execution will take place in Grapevine, TX at its company-owned manufacturing facility. As discussed in Note 4 of the Company's consolidated financial statements included in the 2004 Annual Report on Form 10-K, the Company has received a notice of default and reservation of rights letter from its lender regarding its term loans as a result of the non-renewal of the Company's CBU contract with the USPS. The Company also has been verbally advised by this lender that its revolving line of credit is not available. The Company is in discussions with the lender to restructure its term and revolving debt with a new loan agreement to be in effect for approximately one year, during which time the Company expects to seek a new lender in Texas, where the Company will be relocating its headquarters by the end of 2005. In addition, after discussions with its lender following the Company's receipt of notice of the non-renewal of the USPS contract, the Company agreed to accelerate repayment of its term loan by making two additional payments, the first of which being a $1,000,000 payment made in May 2005 and the second being a payment later in 2005 of an amount to be determined in the course of the Company's discussions with its lender regarding the restructuring of its debt. If the Company is unable to restructure its term and revolving debt with its current lender or to refinance its mortgage loan and obtain financing from a new lender on terms acceptable to the Company, the financial position of the Company would be materially adversely affected. Additional risks and uncertainties not presently known to the Company or that the Company currently deems immaterial may also impair its business operations. Should one or more of any of these risks or uncertainties materialize, the Company's business, financial condition or results of operations could be materially adversely affected. The restructuring plan adopted by the Company's Board of Directors assumes that certain material changes in the operations of the Company will be sufficient to allow the Company to continue in operation despite the loss of its CBU contract with the USPS, which provided over 50% of the Company's sales revenues in each of 2004, 2003 and 2002, and that the Company is able to restructure its long- term debt and obtain short-term financing. If the restructuring plan, as it may be modified by the Company's Board of Directors from time to time to reflect changing conditions and circumstances, does not adequately reduce the Company's expenses and the Company is not able to obtain new financing, the Company's ability to remain in business would be adversely affected and the Company may not be able to continue to operate. In addition, the restructuring plan assumes that the cost reductions would occur in accordance with the time line set forth in the restructuring plan. A failure by the Company to adhere to the time line or to incur greater than anticipated restructuring expenses as set forth in the restructuring plan also would adversely affect the Company. 2. Provision for income taxes is based upon the estimated annual effective tax rate. The impairment charge of $6,155,204 related to goodwill (see Note 7) is a charge to earnings for financial reporting purposes and is non-deductible for income tax reporting purposes. The goodwill was originally recorded as part of a stock acquisition and a tax free exchange for income tax reporting purposes. 3. The Company reports earnings per share in accordance with the Statement of Financial Accounting Standards No. 128, "Earnings Per Share." The following table sets forth the computation of basic and diluted earnings per common share: 6
THREE MONTHS THREE MONTHS ENDED MARCH 31, ENDED MARCH 31, 2005 2004 --------------- --------------- Numerator: Net (loss) income $ (5,697,031) $ 630,820 ============= ========== Denominator: Denominator for basic earnings per share - weighted average shares 1,534,146 1,534,146 Effect of Dilutive Securities: Stock options - 21,144 ------------- ---------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversion 1,534,146 1,555,290 ============= ========== Basic (loss) earnings per common share: Net (loss) income $ (3.71) $ .41 ============= ========== Diluted (loss) earnings per common share: Net (loss) income $ (3.71) $ .41 ============= ==========
The Company had 80,600 stock options outstanding for the three-month period ended March 31, 2005, which were not included in the common share computation for earnings (loss) per share, as the common stock equivalents were anti-dilutive. 4. Inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out method for over 75% of the inventories.
MARCH 31, DECEMBER 31, 2005 2004 ----------- ------------ Finished goods $ 1,322,729 $ 913,415 Work-in-process 1,643,845 2,388,049 Raw materials 3,381,282 3,628,651 ----------- ------------ 6,347,856 6,930,115 Less allowance to reduce to LIFO basis (466,619) (466,619) ----------- ------------ $ 5,881,237 $ 6,463,496 =========== ============
7 5. Total comprehensive (loss) income consisting of net (loss) income and foreign currency translation adjustment was $(5,686,290) and $617,736 for the three months ended March 31, 2005 and March 31, 2004, respectively. 6. The following sets forth the components of net periodic benefit cost of the Company's defined benefit pension plan for the three months ended March 31, 2005 and 2004:
MARCH 31, MARCH 31, 2005 2004 --------- --------- Service cost $ 83,455 $ 73,149 Interest cost 65,281 57,990 Expected return on plan assets (62,697) (54,370) Net actuarial loss 15,698 13,488 Amortization of prior service cost 377 377 --------- --------- Net periodic benefit cost $ 102,114 $ 90,634 ========= =========
For additional information on the Company's defined benefit pension plan, please refer to Note 7 of the Company's consolidated financial statements included in the 2004 Annual Report on Form 10-K. 7. Due to the significance of the reduction in business volume resulting from the loss of the USPS contract on February 8, 2005, management determined that the fair value of the Company had declined significantly. In accordance with FAS No. 142, "Goodwill and Other Intangible Assets", the carrying value of goodwill is tested for impairment when such events occur and a charge to earnings is required for any identified impairments. This charge to earnings is to be recorded in the period in which the events causing impairment occurred. Based on management's recent analysis, the fair value of the Company, after the loss of the USPS contract on February 8, 2005, is no longer in excess of the carrying value of the net underlying assets, including goodwill. The second step of the Company's test for impairment indicates that no goodwill exists. Accordingly, the Company recorded an impairment charge of $6,155,204 in the quarter ending March 31, 2005. The Company also evaluated its inventory for impairment in accordance with ARB No. 43, "Accounting for Inventory", and expected losses related to committed purchase orders. As a result, the Company recorded an inventory impairment charge of $147,000 and accrued $125,000 for an anticipated loss on committed purchase orders. The expense was recorded as cost of sales. 8. As discussed in Note 4 of the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2004, on March 18, 2005, the Company received a default and reservation of rights letter from its lender regarding its term loans. The Company has also been verbally advised by this lender that its revolving line of credit is not available. As a result, the Company's debt may be due in full if called by the lender and is therefore classified as a current liability. The Company is in discussions with the lender to restructure its term and revolving debt with a new loan agreement to be in effect for approximately one year, during which time the Company expects to seek a new lender in Texas, where the Company will be relocating its headquarters by the end of 2005. In addition, after discussions with its lender following the Company's receipt of notice of the non-renewal of the USPS contract, the Company agreed to accelerate repayment of its term loan by making two additional payments, the first of which being a $1,000,000 payment made in May 2005 and the second being a payment later in 2005 of an amount to be determined in the course of the Company's discussions with its lender regarding the restructuring of its debt. 8 9. As disclosed in Note 16 of the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2004, the Company accrued for an environmental settlement of $1,102,000, net of anticipated insurance proceeds. At March 31, 2005, this liability remained unpaid. As of July 2005, all but a $200,000 installment, which is to be made in August 2005, has been paid. 10. In May 2005, the Company announced that it would undertake restructuring initiatives to realign its organization in response to the loss of its CBU contract with the USPS. The Company's plan calls for significant reductions in selling, general and administrative costs. A majority of the cost reductions will be realized by relocating the Company's headquarters from leased facilities in Jamestown, NY to a Company-owned facility in Grapevine, TX. In addition, savings will be realized by eliminating certain corporate level staff and several satellite sales offices. To implement the restructuring plan, management anticipates incurring aggregate impairment charges (exclusive of goodwill impairment) and costs of approximately $2,290,000. In accordance with Financial Accounting Standards (FAS) No. 146 "Accounting for Costs Associated with Exit or Disposal Activities", costs associated with an exit or disposal activity are recognized when the associated liabilities are incurred. As a result of the restructuring initiative, a pre-tax charge of $272,000 related to impaired values of inventories and expected losses related to committed purchase orders for raw materials is included in the cost of sales for the first quarter of 2005. Additional anticipated impairment charges and costs will include a charge to pre-tax operating results in 2005 totaling $673,000 for the following: Impairment of machinery and equipment $ 150,000 Severance pay for displaced employees 473,000 Other costs 50,000 ---------- $ 673,000 ==========
The balance of the costs to be incurred as the Company implements the restructuring plan include professional services, outside consulting fees and compensation. 11. In May 2005, the Company received a dividend from its Canadian operations of CDN$800,000, an amount equivalent to US$604,000. This amount is net of Canadian withholding taxes of CDN$40,000. The Company is evaluating the impact of the American Jobs Creation Act of 2004, which allows, if elected, a reduction in the amount of the dividend taxable for U.S. federal income tax purposes. The potential tax consequence of the dividend from the Canadian operations is expected to be less than US$60,000. 9 ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND As more fully set forth in the Annual Report on Form 10-K filed by the Company for its fiscal year ended December 31, 2004, on February 8, 2005, the Company announced that it was notified that its contract with the United States Postal Service (USPS) for polycarbonate and aluminum Cluster Box Units (CBUs) would not be renewed, and the contract expired on May 31, 2005. During 2004, 2003 and 2002, sales to the USPS accounted for 53.9%, 52.7% and 56.4%, respectively, of the Company's net sales. In addition, sales of the current model polycarbonate and aluminum CBUs to the private market accounted for an additional 18.9%, 14.6% and 10.2% of the Company's sales in 2004, 2003 and 2002, respectively. As a result, the Board of Directors of the Company has adopted a restructuring plan to reduce annual selling, general and administrative expenses by at least $3,000,000, and the Company has recorded an impairment charge of $6,155,000 in the first quarter of 2005 to recognize impairment of goodwill and approximately $272,000 for inventory losses. See Note 7 in Item 1 of this Quarterly Report. Since May 31, 2005, the Company has experienced continuing sales of its current CBU models to the private market, and it is unclear when such sales will begin to decline as the new 1118F CBU specification described below is introduced to the private market and purchasers begin to purchase such units rather than the Company's current model units. The USPS has advised the Company that it intends to phase out approval of the current model CBUs in the private market by September 30, 2005. Because private purchasers will have an inventory of current model CBUs on that date and because of uncertainty as to the size of supply of the new 1118F model CBUs available to the private market prior to that date, the impact of the September 30, 2005 date is unclear. So long as local postal authorities are willing to install postal locks on the current model CBUs being installed in their local area, private purchasers may be willing to continue to purchase and install current model CBUs. The Company does not expect any significant change in sales of its other postal and locker products. The USPS has advised the Company that it may receive by the end of August 2005 a new specification and design that will apply to CBUs sold in the private market as early as Fall 2005. The Company intends to review this new specification and design, as well as strategic pricing considerations, to determine whether the Company will pursue the development and manufacture of CBUs meeting the new specification for sale in the private market. RESTRUCTURING PLAN AND RELATED RISKS As described more fully in the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2004, the Company's Board of Directors has adopted a restructuring plan to reduce annual selling, general and administrative expenses by at least $3,000,000. Most of these savings would be achieved by personnel reductions in Jamestown, New York, and by subsequently relocating Company headquarters from leased facilities in Jamestown, New York, to company-owned facilities in Grapevine, Texas, by the end of 2005. To date, the personnel downsizing has included a reduction in the executive, administrative and sales staff in 10 Jamestown to be completed by the end of 2005, and the elimination of three satellite sales offices. The Company believes that its non-postal locker sales can be adequately handled by the remaining four satellite sales offices located strategically across the country. Substantial uncertainty exists as to whether the Company can implement the restructuring plan in a manner that will allow the Company to continue as a going concern. Management believes that it will be able to continue as a going concern if it successfully implements its restructuring plan, which contemplates that it will develop and commence sales of 1118F CBUs to the private market in the first quarter of 2006. If the restructuring plan, as it may be modified by the Company's Board of Directors from time to time to reflect changing conditions and circumstances, does not adequately reduce the Company's expenses, the Company's ability to remain in business would be adversely affected. A failure by the Company to adhere to the time line or the incurrence of greater than anticipated restructuring expenses as set forth in the restructuring plan also would adversely affect the Company. Restructuring costs are currently anticipated to be substantially greater in 2005 than originally estimated at the time the restructuring plan was adopted by the Board of Directors. RESULTS OF OPERATIONS FIRST THREE MONTHS 2005 VERSUS FIRST THREE MONTHS 2004 OVERALL RESULTS AND OUTLOOK The first quarter of 2005 showed a 4.1% drop in net sales from the same period in 2004, a decline from $9,554,307 to $9,160,220. A net loss of $5.7 million was reported, which included pre-tax asset impairment charges of $6.1 million representing the write-down of goodwill and a $0.3 million charge for inventory losses. NET SALES Net sales were down across all of the Company's basic product groupings. Plastic postal locker sales to the USPS, which include polycarbonate (or plastic) CBUs and Outdoor Parcel Lockers, were $4.2 million in the first quarter 2005 versus $4.5 million in the same period of 2004, a decline of 6.6%. Locker and metal postal product sales were $4.9 million in the first quarter of 2005 versus $5.0 million in the first quarter of 2004, a decline of 2.8%. Notwithstanding the loss of the USPS postal contract, the Company experienced relatively little decline in CBU sales in the first quarter 2005, as the contract originally set to expire on February 28, 2005 was extended to May 31, 2005, and the USPS announced that the current CBU model (1118E) would remain an approved USPS product through September 2005. COST OF PRODUCTS SOLD Cost of Products Sold in the first quarter of 2005 were $6.5 million compared to $6.4 million for the same period in 2004. Costs of Products Sold as a percentage of net sales was 70.5% in 2005, compared to 67.1% in 2004. Increased costs of metals in the first quarter of 2005 as compared to the first quarter of 2004 adversely impacted cost of products sold. The increase in the first quarter of 2005 is also due in part to a charge of $272,000 related to the Company's recognition of impaired values of certain inventories on hand and expected losses related to committed purchase orders for raw materials. The increases were offset by a decrease in the number of units sold. ASSET IMPAIRMENT CHARGE - GOODWILL 11 Due to the loss of the Company's CBU contract with the USPS (see Note 7 in Item 1 of this Quarterly Report), management has determined that the fair value of the Company has declined significantly. Therefore, the Company, in accordance with the provisions of FAS No. 142, "Goodwill and Other Intangible Assets", has recorded a goodwill impairment charge against 2005 first quarter operating results in the amount of $6,155,204. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling and general administrative expenses for first quarter 2005 were $1.9 million or 20.5% of net sales, slightly better than the 21.0% of the prior year, due primarily to a $75,000 decrease in bonuses paid, a $78,000 decrease in research and development of a discontinued product and an increase of $27,000 related to freight charges. INTEREST EXPENSE Interest expense of $107,417 for the first three months of 2005 is relatively comparable to interest expense of $115,749 for the same period in 2004. The decrease resulted from lower average outstanding balances in 2005 compared to 2004 as the Company continues to make scheduled debt payments, offset by the impact of higher effective interest rates. No new long-term debt was incurred during 2004 or during the first three months of 2005. The Company made debt repayments of $1,669,823 during the twelve month period ended March 31, 2005. INCOME TAXES The effective tax rate was 39% and 40% in 2005 and 2004, respectively, on earnings, excluding in 2005 the asset impairment charge associated with goodwill. The ratio of income taxes to loss before income taxes does not bear a normal relationship, as the impairment charge related to the write-off of goodwill in the amount of $6,155,204 is not deductible for income tax reporting purposes because the goodwill was originally recorded as part of a tax-free exchange. NET (LOSS) INCOME Due primarily to the charge against operations for goodwill impairment discussed above, the Company recorded a net loss in the first quarter of 2005 of $5,697,031 compared to the net income of $630,820 for the same period in the prior year. 12 LIQUIDITY AND SOURCES OF CAPITAL The Company's liquidity is reflected in the ratio of current assets to current liabilities, or current ratio, and its working capital. The current ratio was 1.7 to 1 at March 31, 2005 and 1.6 at December 31, 2004. Working capital, the excess of current assets over current liabilities, was $7,031,181 at March 31, 2005, an increase of $315,979 over $6,715,202 at December 31, 2004. On March 18, 2005, the Company received a notice of default and reservation of rights letter from its lender regarding the Company's term loan as a result of the non-renewal of its CBU contract with the USPS. To date, the Company has made all scheduled payments on its term loan and its outstanding mortgage loan. In addition, the lender has verbally advised the Company that its revolving line of credit is not available. The Company has no long-term capital commitments or obligations, although this situation may require re-evaluation upon receipt of the USPS drawing and design package for the new 1118F CBU. The Company is in discussions with the lender to restructure its term and revolving debt with a new loan agreement to be in effect for approximately one year, during which time the Company expects to seek a new lender in Texas, where the Company will be relocating its headquarters by the end of 2005. The initial proposal by the lender provides that the Company (i) pay down the remaining balance of its term loan, which is approximately $2,700,000, in 2005, (ii) maintain its mortgage loan due in 2006, which has an outstanding balance of approximately $2,300,000, and (iii) have available a revolving line of credit of $1,000,000, subject to terms and conditions to be negotiated. The real property and building which secures the Company's mortgage loan have been appraised by the lender at a value of approximately $3,000,000. The Company expects to have sufficient cash on hand to pay off its term loan and further expects to be able to refinance its mortgage loan with a new lender in Texas. If the Company is unable to restructure its term and revolving debt with its current lender or to refinance its mortgage loan and obtain financing from a new lender on terms acceptable to the Company, the financial position of the Company would be materially adversely affected. EFFECT OF NEW ACCOUNTING GUIDANCE The Financial Accounting Standards Board (FASB) issued SFAS No. 123(R) - "Share Based Payment" during December 2004. SFAS 123(R) is effective for fiscal years beginning after June 15, 2005 and will require the Company to recognize compensation expense in an amount equal to the fair value of share based payments. The impact of SFAS 123(R) does not have a material impact on stock options currently issued, but may in the future if additional stock options are issued. The FASB has also issued SFAS No. 151 - "Inventory Costs - An Amendment to ARB No. 43, Chapter 4" effective for fiscal years beginning after June 15, 2005. SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges. The Company is in the process of evaluating the impact of implementing SFAS 151. FORWARD-LOOKING INFORMATION 13 This Quarterly Report on Form 10-Q contains various "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve certain known and unknown risks and uncertainties, including, among others, those contained in Item 1, "Business," and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". When used in this Quarterly Report on Form 10-Q, the words "anticipates," "plans," "believes," "estimates," "intends," "expects," "projects," "will" and similar expressions may identify forward-looking statements, although not all forward-looking statements contain such words. Such statements, including, but not limited to, the Company's statements regarding business strategy, implementation of its restructuring plan, competition, new product development and liquidity and capital resources are based on management's beliefs, as well as on assumptions made by, and information currently available to, management, and involve various risks and uncertainties, some of which are beyond the Company's control. The Company's actual results could differ materially from those expressed in any forward-looking statement made by or on the Company's behalf. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will in fact prove to be accurate. The Company has undertaken no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 4. CONTROLS AND PROCEDURES The Company carried out an evaluation, under the supervision and with the participation of its management, including its principal executive officer and principal accounting officer, of the effectiveness of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of March 31, 2005. These disclosure controls and procedures are designed to provide reasonable assurance to the Company's management and board of directors that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to its management as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, including all matters discussed in the paragraphs below, the principal executive officer and principal accounting officer of the Company have concluded that the Company's disclosure controls and procedures as of March 31, 2005 were not effective, at the reasonable assurance level, to ensure that (a) material information relating to the Company is accumulated and made known to the Company's management, including its principal executive officer and principal accounting officer, to allow timely decisions regarding required disclosure and (b) is recorded, processed, summarized and reported within the time periods specified in SEC's rules and forms. There were no changes in the Company's internal control over financial reporting during the first quarter of 2005. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Taking into account the communications dated May 11, 2005 and June 28, 2005 by the Company's independent registered public accounting firm to the Audit Committee of the Board of Directors, management has identified the following material weaknesses in the Company's internal control over financial reporting: 14 - Lack of a Chief Financial Officer possessing necessary experience and expertise to oversee the financial accounting and reporting responsibilities of an SEC registrant. - Inadequate internal control over financial accounting and reporting to produce financial statements in accordance with U.S. generally accepted accounting principles. - Proposal by the Company's independent registered public accounting firm of several adjustments of material amounts as a result of its audit procedures, including as a result of an adjustment by the Company to SMC's inventory in excess of $900,000 without sufficient analysis to evaluate all of the underlying reasons for the adjustment. - Provision of untimely and insufficiently detailed financial information to management and the Board of Directors to facilitate adequate over-sight. - Untimely reconciliations of bank accounts and failure of the Company's management to monitor the timeliness of the reconciliation process. - Quantifications of Company inventory maintained offsite with reasonable precision only annually. - Inadequate procedures in place to ensure that purchases or sale transactions are recorded in the appropriate accounting period. - Failure to routinely maintain the Company's perpetual inventory system. - Incomplete reconciliations of subsidiary ledger systems to the general ledger. - Insufficient entity level controls, as defined by COSO, to ensure that the Company meets its disclosure and reporting obligations. Management has endeavored to address the material weaknesses noted above and is committed to effectively remediating known weaknesses. Although the Company's remediation efforts are currently on-going, control weaknesses will not be considered remediated until new internal controls over financial reporting are implemented and operational for a period of time and are tested, and management concludes that these controls are operating effectively. In particular, management is in the process of making the following significant changes in the Company's internal controls over financial reporting that would materially affect, or are reasonably likely to materially affect, its internal control over financial reporting: - Actively conducting a search for an individual to serve as Chief Financial Officer. - Implementing more thorough and detailed reviews of financial information. - Developing a reporting package that includes interim financial statements, gross margin analysis, sales reports and material non-financial data by company. 15 - Implementing a prescribed time table for the prompt, regular reconciliations of bank accounts, with the bank reconciliations reviewed by management. - Conducting regular physical inventories of the Company's offsite inventory. - Implementation of additional procedures to ensure that purchase or sale transactions are recorded in the appropriate accounting periods. - Regularly updating and reconciling the Company's perpetual inventory records and increasing the information regarding inventory that is readily available for analysis. - Investigating the reasons for the number of immaterial reconciliation discrepancies between the general ledger and the subsidiary ledgers for accounts receivable, accounts payable and equipment. - Implementing entity level controls such as (i) a detailed policy and procedures manual; (ii) a strategic plan and business model; (iii) a budgeting/forecasting control activity; (iv) formalize and enhance management reporting procedures, including those to the audit committee; and (v) implement formal self-monitoring procedures. PART II. OTHER INFORMATION Item 6. Exhibits and Financial Statement Schedules (b) Exhibits. 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. 31.2 Certification of Principal Accounting Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 16 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN LOCKER GROUP INCORPORATED /s/Edward F. Ruttenberg ----------------------- Edward F. Ruttenberg Chairman, Chief Executive Officer, Chief Operating Officer and Treasurer August 1, 2005 17